Highlight

We recently met with company for an update after it announced to purchase third rigs from Sembcorp Marine which is expected to be delivered in 3Q16. We gather from management that the construction of Perisai Pacific 101 is on track to delivery in May 14 with potential to be earlier than expected. We expect the company to win a charter contract for the rig 2-3 months before delivery.

The company has partnered with Talisman in the bidding for Block PM-9. This is positive as Perisai will be able to deploy the MOPU for this maturing oilfield if the partnership wins the tender. In addition, Perisai will benefit from other services required for the field such as drilling and pipelaying. We expect the result for the Block PM-9 to be announced in 1Q14. The upcoming 4QFY13 result should be weak as E-3 and MOPU were out of work with estimated burn rate of RM6m per month for both vessels.

The company announced a private placement to issue up to 108.4m new shares (10% of existing issue shares) to raise gross proceeds amounting RM165.9m (based on indicative issue price of RM1.53) for partial repayment of bank borrowings, capital investment for jack-up rigs, MOPU and working capital.

Comment

We came away from the meeting feeling positive despite the hiccup in near-term. We understand that the upcoming 4QFY13 will be weak and uncertainty will remain on the timing of securing contract for E3 and MOPU. However, market has underappreciate the potential contribution from the producing and drilling assets (FPSO and Jack Up rigs, collectively contribute 67% earnings in FY15), which was masked by the absence of revenue from E3 and MOPU. While it is expected to dispose the E3 in FY15, we are optimistic that the company will secure a contract for MOPU given the demand for this asset due to interest in marginal oilfield and increase rejuvenating activities for existing oilfield. We advise long term investors to look beyond FY14 with better earnings to filter through in FY15.

Perisai is a cheaper proxy to drilling related stocks. Currently, Perisai is trading at 11.2x CY15 P/E versus UMW Oil and Gas at 22x CY 15 P/E. We deemed the huge discount to be unjustified and expect the valuation gap between UMW O&G and Perisai to narrow down going forward once Perisai dispose of E3 and secured a contract for MOPU.

Forecasts

We cut FY13 earnings by 9% after factored in higher burn rate from E3 and MOPU. FY14 earnings will be reduced by 28% as we only factored in 6 months contribution from E3 (versus 12 months previously) and lower net margin for jack up rig due to initial learning process and additional cost in hiring third party to operate the rigs. However, FY15 earnings raised by 6% due to higher USDMYR rate.

Valuation

We maintained our BUY call with TP raised from RM1.93 to RM2.06 (based on unchanged 14x FY/15 EPS of 14.7 sen/share).

Source: Hong Leong Investment Bank Research - 17 Feb 2014